Nov192015
Celebration of FHA solvency premature
The FHA traded in a viable long-term income stream for some short-term refinance revenue creating potential for future shortfalls to the fund.
Supporters of HUD Secretary Julián Castro, a potential VP running mate, gloated over the recent news that the FHA insurance fund swelled to reach it’s 2% capital reserve mandate. But the celebration is premature. The FHA insurance fund is not as strong as politicians want to spin it.
The FHA became the replacement for subprime lending during the housing bust. It insured millions of loans as prices crashed, and many of those borrowers defaulted and many more are still underwater. With many delinquent loans and collateral values below loan balances, the FHA stands to lose billions.
The FHA is mandated by Congress to hold a 2% reserve for loan losses. As the losses mounted, they fall below their minimum loss reserve requirement, prompting critics to warn of an expensive bailout. To combat the problem, the FHA raised fees to increase revenues — high enough to be branded a predatory lender.
Unfortunately, the high cost of FHA insurance caused FHA originations to plunge, particularly at the entry level in the housing market, which fell to a three-decade low. I opined that lowering the FHA would spur the housing market, and that pressure would mount to lower the fees to revive sales. Not long thereafter, the FHA did lower its fees, and it’s one of the main reasons sales are higher this year.
Reducing FHA insurance fees was controversial because many believed lowering fees would lead to insolvency because the FHA would not have the income stream necessary to meet future obligations. The wager was that spurring the housing market would lift home prices and improve the recovery on the bad loans. But did it really pay off?
The investment property refinance analogy
What policymakers accomplished by increasing FHA insurance fees is best understood by comparing the accounting to refinancing an investment property.
Imagine you owned a cashflow positive investment property. If the property has no debt, the future cashflow of this property is the the net income over time. The higher the rent, the larger the future cashflow. Similarly, the FHA can estimate its future cashflow by projecting the future insurance payments over time. The higher the insurance rate, the larger the future cashflow to the fund.
Now imagine you decide to take cash out of the investment property. You would obtain a large, up-front payment, but since you must repay the debt, the ongoing cashflow will be lower. Something similar is at work at the FHA.
When an FHA insured loan is originated, the FHA charges both an up-front fee and an ongoing fee. When they lowered their ongoing fee earlier this year, in addition to prompting more sales originations, it also prompted a great deal of refinances to lower the long-term fee. That refinancing triggered a new up-front fee, which is why the money flooded into FHA coffers ahead of projections.
So be clear about what they did: They traded in a more-valuable long-term income stream for a short-term boost in revenue.
FHA reaches capital mandate and here’s what’s next
Ben Lane, November 16, 2015
The Federal Housing Administration surprised some observers Monday when it announced that its Mutual Mortgage Insurance Fund grew significantly in fiscal 2015, reaching its Congressionally mandated threshold of 2% well ahead of the FHA’s own projections. …
A deeper look at the FHA’s data shows that the increase was not entirely driven by the significant increase in loan volume during fiscal 2015, due largely to a 50 basis point cut in annual mortgage insurance premium prices announced in January by the Obama Administration.
According to analysis from Compass Point Research and Trading, the FHA’s mortgage interest rate reduction actually had “little impact” on the capital ratio.
… much of the increase was driven by the FHA’s Home Equity Conversion Mortgage program.
Without the HECM program, the MMI Fund would sit at 1.65%, below the 2% threshold set by Congress.
As I stated above, the refinancing revenue created the illusion of solvency.
The inclusion and impact of the HECM program in the FHA’s total capital reserve ratio was specifically noted by House Financial Services Committee Chairman Jeb Hensarling, R-Texas, who said in a statement that the achievement of the 2% threshold is hardly a cause for celebration. …
“Hardworking taxpayers remain exposed to more than $1 trillion in FHA insured mortgage credit risk, and the FHA capital reserve remains woefully insufficient,” Hensarling said. “In fact, were it not for the FHA’s volatile reverse mortgage program, the FHA single-family loan portfolio would still be below the legally required 2% threshold.”
Like all the can-kicking from the housing bubble, the move to lower the FHA insurance fees was a gamble on future house prices. If lowering the fees brings first-time homebuyers back to the market, and if this increased demand continues pushing prices higher, then when the FHA closes out these old bad loans, they will recover enough money to bail themselves out. If prices aren’t high enough, then the fund will probably need another bailout.
It was a courageous move. If it all works out, Obama (and probably Castro) will look like geniuses. If it blows up and the FHA needs a future bailout, the politicos will have some spinning to do.
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Housing Market Takes Dramatic Turn as Sales Flatten in October
Home sales stalled in October, increasing just 0.3 percent from last year, an abrupt slowdown from September’s double-digit growth. Twenty-seven of 67 metros tracked by Redfin had fewer transactions, including hot markets like Seattle, Denver, Austin, Miami and Dallas.
When compared to September, sales slowed everywhere last month but in San Francisco, Buffalo, Allentown and Miami.
The sharp downturn in transactions was more than a typical seasonal slowdown, but it’s not yet apparent why it happened. A shortage of homes for sale, rain in parts of the country, and new federal rules on closings all might have played a part. In addition, sales were particularly robust in October 2014, which made last month slower by comparison.
The supply of homes for sale remained tight, particularly in Miami and on the West Coast. Nationwide, inventory fell 4.3 percent from a year ago. The number of new listings grew at their slowest pace since since May, up 3.5 percent from a year ago.
Only four metros – San Francisco (12.4%), Buffalo (4.0%), Allentown (2.9%), and Miami (0.6%)–had an increase in sales compared to September.
wow, this is the first house I can remember where the cash out per month is less than rent!
Are we back to the 90s?
The power of low interest rates to stimulate payment affordability drives this entire bubble reflation rally.
I know you keep claiming we are not in a second bubble but when I see graphs like this it makes it hard to buy back into the housing market.
https://research.stlouisfed.org/fred2/series/BASE
Why?
Every assertion or opinion must be followed by a “because…”
The forces on the other side which have managed to contain it. If all that money printing could at best cause low inflation and a pretty stagnant economy what is the size of the deflationary forces against it?
How big is the ocean? We build sea walls all over the world which hold back the tides and seasonal storms pretty effectively. It doesn’t matter how great the force, but the size of the immovable object opposing it.
The difference with the FED is that it can raise or lower the wall at will. Timing isn’t perfect, but it’s still far better to be able to respond when a 500 yr financial storm hits, then to allow everything to be carried out to sea.
As the financial winds and storm surge abates, the Fed can lower the sea wall again. This will have the effect of restraining inflation as excess supply of UST and MBS hits the market, drives down prices and drives up rates above the rising natural rate. The Fed will decide to sell based on its dual mandate of full employment and moderate inflation.
So why worry?
It feels like just another manufactured credit boom. When the boom finally goes bust like they always do we are going to have a bunch of people trapped in their underwater homes again. The loans are stable but their employment is not.
The record sales of overpriced collector cars and art work make it even more obvious. It’s the kind of absurd status symbols the affluent buy when the credit boom is peaking.
If I understand correctly, you are of the opinion that buying a house when credit is cheap and plentiful, is just bad timing. If credit was more expensive and difficult to get, then prices would be lower.
If you are a cash buyer, or have a large down payment, then lower prices and less financed-buyer-competition will help lower prices. But, that cash is more expensive since you are foregoing investments at higher rates.
My take is that as long as buyers are being qualified, then price distortion is at a minimum; which makes this the best time to buy historically.
I don’t want to get trapped underwater again no matter what the interest rate or price is.
I understand your caution, and there is a risk, but with today’s stable loan terms, you won’t be in a circumstance where you can’t afford your house.
The problem so many underwater borrowers had a few years ago wasn’t just that they were underwater. They were underwater, they were paying more than comparable rent, and most of them were facing the prospect of increasing payments in the future. Nobody wants to be trapped in that situation.
But those aren’t the circumstances today. If you are in a position to buy, you shouldn’t let fear prevent you. Yes, you could end up underwater, but it will be far less painful with a fixed-rate mortgage, particularly one that amortizes more quickly with a low interest rate.
U.S. housing starts hit seven-month low
U.S. housing starts in October fell to a seven-month low, weighed down by a steep decline in the construction of multi-family homes.
While the drop in groundbreaking activity reported by the Commerce Department on Wednesday implied a moderation in residential investment early in the fourth quarter, it did little to change the view that the Federal Reserve would hike interest rates next month.
In the wake of the soft October housing numbers, Barclays trimmed its fourth-quarter gross domestic product estimate by one-tenth of a percentage point to a 2.2 percent annual rate.
“Homebuilding may not keep the Fed from ‘liftoff’ but it will be their biggest concern. When Fed officials say they want to see more investment spending this recovery, they really mean residential housing construction,” said Chris Rupkey, chief financial economist at MUFG Union Bank in New York.
Republican governors vow to block Syrian refugees
Compassionate Conservatism is dead
LAS VEGAS (AP) — Defiant Republican governors on Wednesday demanded the Obama administration suspend plans to resettle thousands of Syrian refugees in their states, charging that screening challenges make it all but impossible to identify terrorists among those seeking refuge in the United States so soon after a series of deadly attacks in Paris.
State leaders from New Mexico to Michigan pleaded with the president to suspend the refugee program — at least temporarily. Others, including Republican governors from Texas and Indiana, claimed the legal authority to block the federal resettlement efforts unilaterally.
“We have the independent authority to completely shut down these refugee relocation programs,” Texas Gov. Greg Abbott said in an interview with The Associated Press on the first day of the Republicans Governors Association two-day meeting in Las Vegas. “The states are saying we are not going to accept any more of these refugees until the United States comes up with an effective vetting program.”
“Posturing notwithstanding, this is a program that actually works on a collaborative basis between the federal government and states,” Pence told reporters on Wednesday in Las Vegas. “What we’ve essentially said is ‘we’re not collaborating with you.'”
steve jobs may not be happy….coz he is 1 of them….
For every ISIS terrorist we think we are excluding, we are probably also excluding a brilliant scientist or next generation entrepreneur. Nobody thinks about that when they act on emotion.
But, for every ISIS terrorist we exclude, dozens of brilliant scientists or next generation entrepreneurs may live to cure unaddressed diseases (psychosis, for instance).
TREASURIES-U.S. bond prices hold losses after housing starts data
Nov 18 U.S. Treasuries prices hovered near their session lows on Wednesday as domestic housing starts slowed to a seven-month low in October but a rise in building permits signaled construction activity would accelerate.
Groundbreaking dropped 11 percent to a seasonally adjusted annual pace of 1.06 million units in October, the lowest level since March, while permits increased 4.1 percent to a 1.15 million-unit rate, the Commerce Department said.
Benchmark 10-year Treasuries notes were down 10/32 in price for a yield of 2.296 percent, up 3.5 basis points from late on Tuesday.
Truth-Telling on China’s Economy
As the leaders of 17 countries gathered in the Philippines Wednesday for the annual Asia-Pacific Economic Cooperation forum, Chinese President Xi Jinping stated the obvious. “The Chinese economy is a concern for everyone,” he said. “We will work hard to shift our growth from just expanding scale to improving its structure.”
What he means is that China’s economic deceleration — the official growth rate of 6.9 percent is a six-year low — is the sign of an economy in transition. It’s moving from an over-reliance on exports and government-led investment to an economy that is more consumer-led.
So how’s that going? First the bad news: The industrial goods-producing sector of the Chinese economy is in recession and likely to remain there for at least another year.
Now the good news: The domestic-oriented service sector is likely to keep growing at low, double-digit rates — and that should result in real GDP growth of 4 percent to 5 percent.
Until recently, China’s economy grew rapidly, thanks to a booming manufacturing sector that imported raw materials and equipment to produce goods that were exported to North America and Europe. Slow growth in the developed world, however, put an end to that ploy.
China’s other stimulus, infrastructure investment, resulted in ghost cities and a pile of debt now totaling 208 percent of gross domestic product. Together, the debt overhang and excess capacity will limit future growth.
Now, exports are declining after decades of 20 percent annual growth. An earlier housing boom, driven by aggressive bank lending in response to the 2007-2009 recession, has been followed by a decline in construction. Growth in capital investment continues to slow. The industrial sector’s growth rate plummeted from a 22 percent annual rate in the second quarter of 2007 to a mere 0.2 percent in the third quarter of this year.
I don’t think red china is in state of banana republic like philipines…. btw how come most of the houses listing r under 700k?
House votes to revamp Qualified Mortgage rules
Presidential veto is looming
http://www.housingwire.com/articles/35644-house-votes-to-revamp-qualified-mortgage-rules
This kind of posturing is silly. It will never get to the President to veto. It’s very unlikely that any bill to change Dodd-Frank will survive a Senate filabuster to get through Congress. And if it did, it would certainly face a Presidential veto. House Republicans must believe they score some political points, or perhaps it’s merely placating their financial donors.
This might be a good “house flip” play. If a Republican becomes President, Congress might push through many bills benefiting predatory creditors. If eligible borrower pool increases by millions of marginal (“risky”) households, the housing bubble could return.
e.g. Buy a house or two the day after a Republican wins the Presidential election. Watch Congress facilitate TBTF banks to make risky mortgage loans to risky borrowers. Watch prices increase 10%+ annually for a few years, then cash-in your profits before the inevitable crash (caused by dumb borrowers, of course).
A wise but cynical way to play the market.
It would be entertaining after the fact to hear the Republicans blame the disaster on Acorn, or some other liberal group that wants to increase credit availability to the masses.
If it’s unfair to exempt small rural lenders from QM, then maybe the better solution is to remove their exemption, rather than exempt all depository institutions? Ah, but THAT wouldn’t benefit the big banks.
So who in Congress is voting to move forward with this bill to benefit Too Big to Fail Banks that everyone hates?
https://www.congress.gov/bill/113th-congress/house-bill/2673/cosponsors
51 Republicans and 4 Democrats
You don’t need this example as proof they’re all hypocrites, but it’s still valuable as further evidence. These Republicans want to allow big banks to make risky loans to those DEADBEAT borrowers who we know are the REAL cause of the housing bubble.
Desperate times call for desperate measures, need to lower the bar to keep fueling the housing ponzi
That’s where we are headed. The bill discussed above is a perfect example.
[…] Celebration of FHA solvency premature What policymakers accomplished by increasing FHA insurance fees is best understood by comparing the accounting to refinancing an investment property. … If the property has no debt, the future cashflow of this property is the the net income over time … Read more on OC Housing News (blog) […]